What’s Private Equity Good For?

Or, more politely, does private-equity ownership make companies more efficient?

It’s an issue that resurfaces every time buyout firms eye a big target among publicly listed companies. Expect the question to be bandied about a lot this week in the run-up to the shareholder vote on the $24.4 billion buyout of Dell Inc.

Academic research has been surprisingly scarce, partly because it is tough to obtain reliable information from private-equity firms and their targets. One of the few solid studies on the topic tested private-equity critics’ charge that PE-owned companies shed thousands of jobs. The conclusion: yes, but not for long. The authors of the study — led by Steven J. Davis, professor of economics at the University of Chicago Booth School of Business — found that employment at existing factories, retail outlets and other “establishments” did fall during the time companies are owned by private equity. However, most of the fall was offset by job creation at new “establishments.” In total, job destruction at PE-owned firms was much lower than at other companies, the study concluded.

The authors are now working on a follow-up, comparing productivity and costs at PE-owned firms and other companies. MoneyBeat had a sneak preview and the results are bound to deepen the debate over the social value of private equity. According to Davis, over a two-year period, PE-owned firms were two percentage points more productive and two percentage points “cheaper” (when measured by the admittedly crude measure of total costs per worker) than other companies. In addition, the productivity increase appeared to come not from old factories and shops but by the new ones opened since the PE firm took over the company.

“This fits with the overall narrative often used by private-equity types that they reallocate resources to more efficient uses,” Davis says.

MoneyBeat can’t wait for the full paper, which should be out in the next few months.